BRICs Buy IMF Debt to Join Big Leagues, Goldman Says

exblBy Lester Pimentel and Valerie Rota

June 11 (Bloomberg) Brazil, Russia, India and China’s plan to shift some foreign reserves into International Monetary Fund bonds may be more a signal of their growing financial clout than a lack of demand for U.S. assets.

“They’re saying they are part of the big leagues,” Alberto Ramos, an economist at Goldman Sachs Group Inc., said in a telephone interview from New York. “They’re not buying IMF bonds to diversify reserves. They want to be seen as having a large voice” in global markets, he said.

Russia and Brazil announced plans yesterday to buy $20 billion of bonds from the IMF and diversify foreign-currency reserves. China will purchase $50 billion and India may announce similar funding, Brazil’s Finance Minister Guido Mantega said. The countries are seeking a stronger voice in international financial institutions such as the IMF, according to He Yafei, a vice foreign minister at China’s Ministry of Foreign Affairs.

Treasuries declined yesterday, pushing benchmark 10-year yields to the highest since October, after the government sold $19 billion of the securities and Russia said it may move out of U.S. debt to buy the IMF bonds. The so-called BRICs, an acronym coined by Goldman Chief Economist Jim O’Neill in 2001 for the biggest emerging markets, have combined reserves of $2.8 trillion and are among the largest holders of Treasuries.

‘Much Bigger’

“If this was the beginning of something much bigger, then the market would front-run that,” said Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA LLC, in an interview from New York. “It wouldn’t be in the interests of Russia or China to watch the value of their assets go down.”

The 10-year yield climbed to as high as 3.99 percent yesterday from 3.86 percent, according to BGCantor Market Data. It was at 3.97 percent at 9:35 a.m. in New York. The yield has surged from 2.21 percent on Dec. 31 as the U.S. steps up debt sales to finance a record budget deficit and pull the economy out of the deepest recession since the 1930s.

The dollar’s status as the world’s sole reserve currency may deteriorate, said Nouriel Roubini, the New York University economics professor who predicted the financial crisis.

“We may see complementary reserve currencies,” Roubini said at a conference today in Athens. While it’s “not going to happen overnight,” the development “will diminish the role of the dollar over time,” he said.

Treasuries slid yesterday in part because the announcement by Russia and Brazil was a “sudden shock,” said David Spegel, head of emerging-market strategy at ING Groep NV in New York.

Selling Treasuries

China has 3.66 percent of votes in the IMF, Russia 2.69 percent, India 1.89 percent and Brazil 1.38 percent, according to the fund’s Web site. The U.S. has a 16.77 percent.

“We are asking to increase the voice and representation of emerging economies,” China’s He said at a June 9 briefing ahead of a BRIC summit next week in Russia.

Alexei Ulyukayev, first deputy chairman of Bank Rossii, said Russia would sell some of its $140 billion of Treasuries to make room for the purchase of the IMF bonds. Mantega said Brazil’s central bank would decide which assets to sell from its reserves portfolio for the transaction.

China’s State Administration of Foreign Exchange said last week that it’s “actively” considering buying as much as $50 billion of the IMF bonds.

India would be “perfectly capable of contributing” to the IMF’s bond program, Montek Singh Ahluwalia, deputy chairman of the nation’s Planning Commission, said in April. The nation may buy IMF bonds worth as much as $10 billion using part of its reserves, India’s Financial Express newspaper reported in April.

Russia Meeting

BRIC nations can’t pull out of the Treasury market because there “aren’t a lot of alternatives out there that are AAA rated,” Spegel said. “With their reserve levels so high — $2 trillion from China — where are they going to put their money?”

The IMF board may consider late this month or in July the proposal to sell the notes, which would be the fund’s first issue, IMF spokeswoman Conny Lotze said today by e-mail. The plan will likely determine other aspects regarding use of the securities, such as whether they can be traded among countries much like U.S. Treasury bonds.

The debt will pay a yield similar to U.S. Treasuries and will be denominated in the fund’s basket of currencies, known as Special Drawing Rights, Mantega said yesterday in Brasilia. The IMF calculates the value of SDRs daily, with 44 percent weighted toward the dollar, 34 percent to the euro and the remainder split between the yen and the pound, according to its Web site.

Geithner Trip

Officials from the BRIC nations are scheduled to meet June 16 in Yekaterinburg, Russia, where they plan to discuss the status of the dollar as the world’s reserve currency. Ulyukayev said Russia will sell Treasuries “because a window of opportunity for working with other instruments is opening,” according to Interfax news wire. The remarks were confirmed by a Bank Rossii official who declined to be named, citing bank policy.

Treasury Secretary Timothy Geithner said in Beijing on June 2 there will be enough demand for record sales of U.S. debt. The U.S. budget deficit is projected to reach $1.75 trillion in the year ending Sept. 30 from last year’s $455 billion, the Congressional Budget Office says.

The spread between 2- and 10-year Treasuries, which reached a record 2.81 percentage points this month, averaged 0.69 percentage points during the fiscal year 2001. During the four- year period of government budget surpluses from 1998 through 2001, the spread averaged 0.22 percentage points.

BRIC Reserves

Geithner met with Chinese officials after Premier Wen Jiabao called in March for the U.S. “to guarantee the safety of China’s assets” and central bank Governor Zhou Xiaochuan proposed a new global currency to reduce reliance on the dollar.

BRIC nations have been adding to their foreign reserves over the past month to stem currency rallies sparked by speculation that the developing nations will help lead the world out of recession. The Brazilian real is up 20 percent against the dollar the past three months. Russia’s ruble has gained 13 percent and the Indian rupee has climbed 10 percent.

The four countries increased international holdings by more than $60 billion last month, according to data compiled by central banks and strategists.

“They want to be seen as good citizens of the IMF,” Goldman’s Ramos said. “It’s an investment that can empower them in the institution.”


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